3 July 2012 0 Comments

Replacing Term With Term: Part 2

Here are more situations where you’ll want to consider replacing one Term Policy with another.

Shorten the duration of the term

Let’s say you purchased a 30 year term, but now five years later, you are in a financial bind and  can’t afford the premium.  Instead of reducing or dropping all life insurance, shorten the duration of yourpolicy to 10 years.  It is likely that your current company will not do this without requiring new evidence of insurability, so you might as well shop around for the best prices.  You’ll need to do something at the end of that time to continue coverage, but in the meantime you have reduced current cost, but not the amount of current protection needed.

Increase death benefit

If you are increasing the amount of insurance you have, you will need to apply for a new policy.  You could keep the policy you have and simply add a new policy, but the premium might be less by combining total coverage into a single policy.  This is because insurance policies usually build a policy fee into the premium.  This fee, in effect, results in a quantity discount.  If the annual fee is $60.00, and the total premium for a $250,000 policy is $400 per year (including the $60 fee), then the total cost of two policies, each for $125,000, would be $460 per year.  Combing this into a single policy saves money, so you might as well replace the existing policy.

Extend conversion time or options

Most term policies provide the right to convert to a permanent policy through the end of the original term period (with some restrictions at older ages).  However, a few policies might provide a 20 year term policy, but only allow for conversions for 5 years.  If your health deteriorates during the time after five years, this could rob you of an important option.  If you have this abbreviated conversion right, it is worth reviewing what the cost of a new policy would be with an extended conversion option.

Earlier I stated that no one can tell you what policies will be available for conversion should you exercise that option.  However, there are situations where you know that the policies being offered for conversion are very high priced.  There are at least two U.S. insurance companies who sold their entire block of competitively priced term business to a reinsurance company who offers only very high priced policies for conversion.  If you happen to have one of these policies and can replace it with a company that—at least for now—offers good conversion premiums, it is worth seeing what the cost would be to do so.

In my next blog I’ll be continuing with the topic of Replacement, covering replacing Permanent Insurance with Term

Leave a Reply